Fortescue chief executive Nev Power joins iron ore war

By Amanda Saunders

Fortescue Metals Group boss Nev Power has backed Western Australia Premier Colin Barnett's attack on BHP Billiton and Rio Tinto for flooding a depressed iron ore market with more supply.

Mr Barnett has accused the mining giants of "acting in concert" and has taken umbrage at the price drop caused by the sharp rise in iron ore production, which is hurting the state's coffers. Mr Power said he sympathised with the Premier's view.

"They were all very happy that they had a cosy oligopoly in the market": Nev Power, Fortescue CEO.Credit:Dominic Lorrimer

"I think it very understandable to hear the Premier's frustration because there seemed to be a rhetoric suggesting that the strategy was to trash the market and then somehow make returns after that," Mr Power said on Thursday.

"But I think everybody would know that is a flawed strategy that has been tried by people for countless years with little success."

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However, Fortescue's latest iron production data shows it too is rapidly increasing production.

The miner has added about 100 million tonnes in new supply over the past four years, and is on track to produce up to 160 million tonnes in the current fiscal year.

But Mr Power stressed that Fortescue signed off on the "well-flagged" strategy in 2010, when the market was under-supplied, saying the miner's timing was "close to perfect".

"Back then none of them were interested in expansions, they were all very happy that they had a cosy oligopoly in the market, and frankly, did their damndest to stop us from developing our business."

"The reason we developed our business in the first place is that no one else was developing the iron ore supply."

Fortescue said on Thursday it had achieved just $US71 a tonne for its iron ore in the September quarter, against a benchmark price of $US90 a tonne, as it delivered yet another shipment record.

Analysts said the miner generated about $US300 million surplus cash in the period.

It was a a dismal quarter for iron ore, opening at US$90 a tonne and closing at about $US79 a tonne. Iron ore has crashed 40 per cent this year, recovering modestly this week to sit at $US83 a tonne.

Mr Power, who told the Australian Financial Review earlier this week that BHP and Rio were taking a "scorched earth" approach with their production expansions, said it was "rather strange" that the world's largest iron ore producer, Vale, was also looking at expansions when iron ore was fetching $US80 a tonne

"When the iron ore price was $US180 a tonne, there was no discussion at all [by Vale] about expansion," he said.

"It seems to be rather misguided logic to me that iron ore companies would not look at the markets and try to time their expansions to meet the market, rather than talking about it now."

Mr Barnett has taken umbrage at the dramatic price falls, and blames Rio and BHP for their "flawed" expansion strategies, which are diminishing royalty payments to the state. Mr Barnett has threatened to raise royalties to recoup lost cash.

Unsurprisingly, Mr Power said the "royalty payments are about right", and higher iron ore prices were the best means to provide relief.

Fortescue , the third-biggest producer in the Pilbara, funded its expansion from 55mtpa to 155mtpa through debt, which hit a peak of $US11 billion in 2012.

Deutsche Bank analyst Paul Young said the two miners were running the right strategy, and taking "a 10-year plus view of the world".

"They are not taking an 18-month view on the impact [of price falls] to their earnings," he says. "It makes sense to push production as hard as they can because the returns increase for every incremental tonne they add to the market."

Fortescue is racing on with its iron ore expansion, shipping at an annual run rate of 166 million tonnes in the quarter, well ahead of its targeted 155-million-tonne rate.

Mr Power said high-cost producers had not exited the market as quickly as predicted amid the supply glut.

"Progressively higher-cost production will exit the market, and in addition to that, people who are looking at expansions will be starting to rethink those and to re-evaluate how long that will take," he told Fairfax Media.

"We are confident that the long-term strong demand for iron ore and the fact that, at this price, there is little incentive for people to continue to invest, so we will see an easing of supply."

When asked if Fortescue could be squeezed out by its two bigger rivals, Mr Power said he was not concerned and the miner was cutting costs.

"While all of us would like a higher iron ore price, we are very comfortable and have very solid cash flows at this iron ore price," he says. "I think the iron ore price will stay low for as long as it takes some of the high cost production to leave the market."

However, he stressed the miner was "not intending to invest more capital until we see the market conditions are right to do that".

Analysts say if depressed prices continue, the miner will struggle to reduce its big debt bill this financial year, which was at $US6.9 billion at 30 September, down from $US7.2billion three months earlier.

Mr Lawcock said the miner generated about $US300 million of surplus cash in the September quarter.

"We see FMG generating positive operating cash flow, but FMG would struggle to reduce net debt over the course of FY15 if the conditions experienced in the September quarter were to persist for the full year," he said.

Fortescue's equity share of shipments for the September quarter was 40.9 million tonnes, up 66 per cent on the 24.7 million tonnes at the same time last year. UBS had tipped FMG's share at 39.1 million tonnes.

The miner will make a $500 million debt repayment on Friday. It is aiming to reduce gearing to 40 per cent by repaying $2.5 billion to $3 billion of its debt, within two years.

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Hindering their attempts to repay debt this year will be a catch-up tax payment due in the December quarter, dividend yet to be paid and pre-payments over the year.

Fortescue mines iron ore from two hubs in the Pilbara - Chichester at 90mtpa and Solomon at 60mtpa with 6mtpa from its joint venture with BC Iron.